Bitcoin – an asset with the best performance in the last ten years. For early investors, this means a return on investment of 100 percent over ten years. How has Bitcoin performed against other asset classes such as stocks, bonds, precious metals and oil in recent times?
Despite the sometimes extremely volatile, the world's first decentralized digital currency rose from less than one cent at the beginning of 2009 to a record maximum of more than 20 000 dollars at the end of 2017. Bitcoin today is trading at around 10 000 dollars.
In this article, we will analyze and compare the absolute Bitcoin earnings against stocks, bonds, gold, silver and oil over the past one, three and five years.
Bitcoin vs. traditional assets
For analysis, we chose stocks, bonds, gold, silver and oil. Stocks and bonds are typically key components of institutional investment portfolios, while gold and silver have characteristics similar to bitcoins. Oil was added due to its low correlation with stocks and bonds.
The table below shows that Bitcoin has surpassed all major assets in all three selected investment periods based on absolute returns.
| Asset | 1-Year Return | 3-Year Return | 5-Year Return |
| Bitcoin | 20% | 1420% | 1550% |
| Stocks (S&P 500 w / Dividends Reinvested) | 8.44% | 46.55% | 66.29% |
| Bonds (AAA-Rated Corporate Bonds) | 11.08% | 10.22% | 24.40% |
| Gold (Spot Price) | 4.74% | -2.45% | -0.85% |
| Silver (Spot Price) | 6.44% | -15.98% | -19.85% |
| Oil (WTI Crude) | -13.96% | 46.09% | -41.72% |
While our analysis covers absolute and risk-free returns (and therefore does not include volatility), figures show that investors longing for a return with a big risk appetite could greatly benefit from adding bitcoins to their portfolios, if the digital asset continues to generate similar returns in the future. There are no guarantees of this.
Bitcoin in each portfolio
The argument presented above suggests that, because of its high potential for profitability, Bitcoin must be included in every well-diversified investment portfolio. However, due to the high risk compared to traditional assets, most experts agree that Bitcoin should be only a small percentage of the portfolio.
However, it is important to note that the case of Bitcoins as part of a portfolio holding company goes beyond the potential for high returns. Bitcoin also stands out as an excellent diversifier, since it is not associated with traditional assets, such as stocks and bonds.
Company Bitwise, specializing in investment in digital assets, told about Bitcoin in report called "Crypto in the institutional portfolio." In this report, Matt Hougan, head of Bitwise’s global research department, and his team analyzed the impact of small deductions on Bitcoin. would have a 60 percent stock portfolio / 40 percent bond in the period from January 1 2014 to March 31 2018.
“A distribution to bitcoin would have significantly increased the portfolio’s risk-adjusted return, assuming the portfolio has been systematically rebalanced over time,” the report says.
In particular, Bitwise found that the distribution of one percent, five percent and ten percent to Bitcoin would bring returns in 31,09 percent, 50,89 percent and 78,38 percent compared to a non-bitcoin portfolio, which would bring only 26,53 percent of total income.
"Radical Protection Portal"
Digital asset investor and outspoken bitcoin defender Anthony Pompiano, also believes that bitcoins should be in every investment portfolio.
In a May 20 tweet, he wrote: “Bitcoin is an uncorrelated, asymmetric returnable asset. By placing it in your portfolio, you can reduce your risk profile, increase your Sharpe ratio, and have a significant impact on your entire portfolio with a one-to-one allocation. Essentially, it improves your portfolio.”
Bitcoin is a non-correlated, asymmetric return asset. You can reduce the amount of money you want to make.
Essentially, it improves your portfolio
- Pump 🌪 (@APompliano) May 19, 2019
In a new blog post titled “Radical Protection Portfolio,” Pompliano argues for a portfolio consisting of 95 percent cash and 5 percent bitcoin, in light of the low projected returns on stocks and bonds and sluggish growth forecasts.
“The risk/reward tradeoff of 95% cash and 5% bitcoin is incredible. First, the risk profile is quite clear - an investor can lose up to 5% of his portfolio in the worst case. A 5% loss would have been a smaller drawdown than the S&P 500 last year (-6,24%). Second, the potential for bitcoin is rather asymmetric. The asset will either be worth much more than it is today, or it will be worthless. This type of binary outcome, combined with the uncorrelated nature of the asset, gives investors a great deal of protection from economic chaos,” he wrote.
According to Pompiano, similar portfolios with 99-percent cash and one percent bitcoin or 98-percent cash flow and two percent bitcoins could be successful in the past, bringing about 10 – 20 percent of annual income.
The proposed Pompliano "Radical Protection Portfolio" will have the risk of a decline of 5% against potential growth of 20% or more. While it may seem odd to hold the 95 percent cash position, this portfolio may outperform most stock and bond portfolios, given the low projected returns for these two asset classes in the coming years.
In light of the high potential for profitability of Bitcoin and other cryptographic assets, it is likely that portfolio managers will find it increasingly difficult to ignore digital assets. Customers want to see high returns regardless of how stocks and bonds work, and Bitcoin may be the best solution.